Wow, or is woe, gas prices are going up. Why? Is it the fact we are running out of oil? How is supply and demand at work? Or is it those crazy speculators?
Speculation has been around since the very beginning of time. People will try to hoard things that they believe will be in short supply. Whether it was wild rice of the first hunter gatherers or oil today. We just complicate the process with our financial systems. Supply and demand are at work as well. And oil production seems to be sustainable for the foreseeable future.
However, when speculators look at the market, they see OPEC controlling the supply of oil. They assume there will be a shortage. They also see the unrest in the middle east, and they see supply issues. These are major things that lead them to believe that oil will be in shortage, therefore they are more willing to bid up the price of oil. But has any of these things actually happened? No. Iran is saber rattling, Eygpt, Iran, Afganistan, Syria, and Libya seem to be in turmoil, some of which is our own fault. Since the Mid East is a major supply of oil in the world, this volativity puts pressure on the oil supply, even though no shortage exists today. So what can we do about it? Attack Iran? Leave Iraq and Afganistan? Buy off the Libyans and Syrians? Let Israel do the dirty work? Or, how about, none of the above. Since the supply is not choked off at present, we have time to set a strategy to combat it, that hopefully will not include the loss of human life. It requires us to think outside of the box. And an important thing to reiterate is that -- it hasn't happened yet.
Why is that so important? It is important because our President and other political leaders say there isn't anything we can do to affect the near term oil supply. So it isn't their problem, we need more electric cars and other green energy solutions so in the future, we will be secure. And I agree to a point. There is one thing our government can do to affect oil supplies, and they can do it today. In a very few weeks we would see prices of oil decline, and gas becoming more affordable. And from a political standpoint would probably cause President Obama to be re-elected. But it doesn't fit the President's agenda, so it is unlikely he will do it.
What is the one thing you ask? Announce to the world that the United States is opening up oil leases across the country, off shore, and inland. However, this is what the political response is: It will not have an immediate affect, those leases will not produce for maybe 10 years or more.
As I said in an earlier post, economics is a social science. Imagine for a moment you own a business, let's say a gas station, on a corner somewhere in town. You find out that a major chain has started the process to build and open a competeing station across the street from you. What would you do? I guess one answer might be to increase your prices, then close when they open. Or maybe, you might consider slightly lowering your prices, to minimize the affect on your business when they do open. Maybe you remodel your store, or reevaluate your selection of goods that you carry. The goal of the second is to try to stay in business to keep your income; and be able to live in the long term. Countries are no different. If that announcement was made, what would OPEC do? They could, as the first example, cut production and drive up prices, which when the new oil becomes available will drive prices down through increased supply, and with the strained relationships, cause OPEC oil to be less desirable. And it would cause American Oil Companies to expedite the production.
Or, and there is history to support this, they will increase production to a point that it doesn't make sense to open new supplies. I lived in Illinois in the 1980's, I saw oil pumps cranking away, until world supply increased to a point that those wells were losing money. The owners shut them down rather than lose money. The wildcard here is OPEC. They set production goals for their members, which in good economic theory affects supply and demand. The immediate impact of increased OPEC production, and speculators seeing an increase in supply, will bring prices down.
One final thing, we do need to follow through on producing more oil domestically for the long term. Oil companies need to be encouraged to continue exploration in North America, rather that take the easy route of just letting a ship dock and off load oil. How we do that is a subject for another post.
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